The Crypto Landscape in Japan

It was reported recently that Circle’s USDC has made history by becoming the first dollar-pegged stablecoin approved for issuance in Japan. The news is a good starting point to try and understand the current legal landscape in the Asian country.

What was the road so far?

Japan has experienced significant challenges in its cryptocurrency journey, despite early adoption by retail investors. The country has suffered two of the largest cryptocurrency exchange hacks in history, leading to a loss of trust and prompting regulators to intervene earlier than in other countries. Notably, the 2014 Mt. Gox hack, involving a Tokyo-based Bitcoin exchange that was once the world’s largest, resulted in the loss of 7% of the total Bitcoin supply at the time.

According to Kaiko Research, Japan’s cryptocurrency market faces hurdles due to exchange listing restrictions and tax policies, causing it to lag behind other regions.

“The trend of JPY-denominated trading volume on exchanges reflects this complex relationship. Interestingly, there was a period when JPY volumes surpassed USD volumes, indicating the significant role of Japanese investors in the early days of cryptocurrency.”, the consultancy company informed.

What’s the current situation?

Japan has adopted a proactive and relatively comprehensive approach to regulating cryptocurrencies and digital assets. Recognizing the potential of blockchain technology and the need to protect consumers, Japan has established a clear legal framework that balances innovation with regulatory oversight.

This framework primarily relies on amendments to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA), classifying various digital assets and outlining specific requirements for businesses operating within the crypto space.

Despite having 29 registered crypto-asset exchanges, Japanese exchanges face challenges competing with international counterparts due to limitations in product offerings, resulting in lower trading volumes. BitFlyer has emerged as a dominant player among domestic exchanges in recent years. However, since the COVID-19 pandemic, Japanese exchanges have struggled to keep pace with global giants like Binance in terms of trading volume.

What is the legal landscape?

According to information provided by Japanese legal consultants to Global Legal Insights, the main features of Japan’s legal framework towards crypto are the following:

• Crypto Assets: Cryptocurrencies and utility tokens are classified as “Crypto Assets” and regulated under the Payment Services Act (PSA). Businesses dealing in these assets must register as Crypto Asset Exchange Service Providers (CAESPs).
• Electronic Payment Instruments (EPIs): Currency-denominated stablecoins fall under the category of “Electronic Payment Instruments” (EPIs), also regulated by the PSA. Businesses handling EPIs need to register as Electronic Payment Instruments Exchange Service Providers (EPIESPs).
• Algorithmic Stablecoins: Algorithmic stablecoins not backed by fiat currency are treated as Crypto Assets if they are transferable on a blockchain.
• Security Tokens: Security tokens, which represent shares, bonds, or fund interests, are regulated under the Financial Instruments and Exchange Act (FIEA) as electronically recorded transferable rights. Businesses dealing with these need to register as Type I Financial Instruments Business Operators (Type I FIBOs).
• Non-Fungible Tokens (NFTs): NFTs, if they don’t function as a means of payment, generally fall outside the current regulatory framework.
• Stablecoin Regulations: Stablecoins are differentiated from other Currency Denominated Assets based on their use as payment to unspecified persons and their purchase/sale to unspecified persons.
• EPI Issuers: Only banks, fund transfer service providers, trust banks, or trust companies licensed in Japan can issue EPIs.
• New Crypto Assets: CAESPs planning to handle a new Crypto Asset must notify the Financial Services Agency (FSA) in advance.
• Asset Segregation: CAESPs are required to keep users’ fiat currency and Crypto Assets separate from their own property. Fiat currency must be held in trust, and Crypto Assets must be managed in separate wallets, with at least 95% in cold wallets.
• CAESP Requirements: To become a CAESP, applicants must be stock companies or foreign CAESPs with a presence in Japan and meet specific financial and organizational requirements.
• Inheritance of Crypto Assets: While theoretically subject to inheritance laws, practical challenges exist due to the anonymous nature of Crypto Assets.